Chapter 17 Final Flashcards by Isabella Perea

What do investment companies do

They pool money of individuals and corporations then invest the money into different assets

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Open End Mutual Funds

Can buy or sell shares at anytime price is based on funds net asset value
- a single share of mutual fund could represent ownership stake in over several companies

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Hedge funds

Usually for wealthy investors or big institutions and invest these funds on their behalf

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What are two types of mutual fund sectors

Short term funds and long term funds

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Short term funds

-include taxable money market mutual funds and tax empt money market funds
- interest rate risk
- virtually have no liquidity or default risk

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Money market mutual funds

consists of various mixtures of money market securities; invests in high quality short term debt instruments and cash equivalents. designed to offer investors high liquidity and low risk

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Tax exempt money market mutual funds

invest in securities whose interest payments are exempt rom federal tax inxome. contain various mixes of municipal debt with a maturity less than a year

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What are the three types of long term funds

Equity funds, bond funds, hybrid funds

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Equity funds

invests in common and preferred stock, well diversified so risk mostly comes from overall market

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Bond funds

consists of fixed income capital market debt securities, extensive interest rate risk because of their long term fixed rate nature.

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Hybrid Funds

consists of both stock and bond securities

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Target date funds

Adjusts risk automatically over time, becomes more conservative as target date gets close

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Lifestyle Funds

Maintain a fixed level of risk, doesn’t change with time

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International Funds

Invest in foreign stock, can focus on emerging markets or developed as well

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Global Funds

Invest in both U.S and international stocks or bonds

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Social Funds

Invest in companies that meet environmental, social, and governance (ESG) standards

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Small Cap v Large Cap funds

Small cap- smaller companies(more growth potential, more risk)
Large cap-big, established companies ( more stable)

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Growth v Value Funds

Growth funds- invest in companies expected to grow fast Low B/M ratios
Value Funds - invest in companies that are undervalued High B/M ratios

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Dividend Funds

Focus on stocks that pay high dividends

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Index Funds

invest in stocks corresponding to a particular stock index
Easy to manage- lower fees

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Intermediate v long term funds

invest in bonds based on term to maturity

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Tax exempt funds

hold municipal bonds

High yield funds

also known as junk bond;bonds are issued by companies with lower credit ratings, which means they carry a higher risk o default but oer higher interest rates to compensate for that risk.

Open end mutual funds

can increase or decrease in size daily with purchases and redemptions of shares

Closed end investment company

has a fixed supply of outstanding shares and do not continuously offer shares for sale

Real estate investment trust (REIT)

closed end inv companies that invest in real estate company share and/or in buying mortgages

What is a prospectus

A summary document that explains what a mutual fund does, given to potential investors, must be written in plain English required by SEC since 1998

Prospectus contains

-investment minimum( How much you need to invest) - Investment objective (goal of the fund) - past returns( 1,3, and 5 years) - risk exposure( how risky the fund is) - services offered( customer support, auto- investing) -fees portfolio manager into

Exchange Traded Funds ETF

Long term mutual funds designed to replicate a particular stock market index

ETF Features

- traded on stock exchanges like regular stocks - prices change throughout the day (inday trading) - can be bought on margin or sold short - Legally open-end, but acts like closed-end because the number of shares stays fixed during the day

ETF benefits

-lower fees than actively managed mutual funds - more flexible than traditional index funds

Net Asset Value (NAV) is what

The price per share of a mutual fund

What is the NAV equation

Total market value of assets under management, minus liabilities, divided by number of mutual fund shares outstanding

Load fund

Up front commission charge paid by investor, intended t provide the investor with more personal attention and advise

Management fee is charged

To meet operating costs

12b-1 fees relate to

the distribution costs of mutual fund shares; this includes fees paid for marketing and selling fund shares, and providing services to shareholders

Under FINRA rules, 12b-1 fees that are used to pay marketing and distribution expenses...

cannot exceed 0.75% of a NAV

Are mutual funds regulated

Yes they are heavily regulated primarily by the SEC because they manage and invest small investor savings

During what time were mutual funds the fasted growing sector in the U.S financial institutions industry

During the 1990s and into the 2000s

Outside the U.S investment in mutual funds increased over

187% from 4.916 trill in 1999 to 14.130 trill in 2007

In 2021 non u.s investments increased to what

to 36.90 trill (increase of 296.1%) from 2008 and U.s investments increased to 34.15 trill (increase of 255.7% from 2008)

What are the two exemptions hedge funds have from SEC requirement

- funds are exempt if they have less than 100 investors - funds are exempt if investor are"accredited"

What does accredited mean

when an investors net worth is over 1 million or annual income over 200,000( 300,000 if married)

Hedge funds are only sold

Via private placements, and may not be offered or advertised to the general investing public

Hedge funds with less than how much money in assets cant register with SEC ( making their data be independently tracked)

less than 100 million

In 2021 how many hedge funds in the U.S had assets of 4.01 trillion

Over 9400

Management fees are

percentage of total assets under managment ( usualy between 1.5% and 2%

Performance fees are unique to hedge funds and have an average of

20% but varies

Hurdle rate

minimum performance benchmark that must be realized before performance fee can be assessed

High water mark

used when the manager does not receive a perormance fee unless the und exceeds highest NAV it previously acheived

Domestic hedge funds are organized in the U.s while

Funds located outside the U.S are offshore hedge funds( not subject to the U.S income taxes or U.S estate taxes

What's the largest penalty on record for insider trading case

1.8 billion which was paid by Steven A Cohens hedge fund after pleading guilty in 2013